Last updated: May 3rd, 2017 at 09:59 pm
Trading these markets is a precarious pastime. Volatility remains elevated and wild swings in key markets are meaning that sentiment is highly changeable. Take the oil price for example (which I see as a key driver of market sentiment). The build in oil inventories yesterday sent WTI sharply lower by 4%, only to recover into the close to end up almost 2%. This has driven a rally on Wall Street that has permeated through Asian trading and subsequently into the European session. Could it also be the fact that China is now on national holiday for the rest of the week which should also help to remove a key driver of recent volatility?
Well, markets seem to be relatively settled this morning with forex and commodity prices showing little significant direction. Although European equities are positive at the open, can this latest rebound in market sentiment last? There is some crucial US economic data in the next two days with the ISM Non-Manufacturing and Non-farm Payrolls. So focus will turn back on the US, but can the economic data provide the market with some well needed stability?
In forex trading the US dollar is showing some slight strength with sterling and yen slightly weaker. The Aussie is also slightly weaker today after Australian trade data disappointed overnight. There is no significant change in gold, silver or the oil prices as the European session takes over.
Traders have a lot to chew over this morning, with all the Eurozone services PMIs, whilst the UK services PMI at 0930BST is expected to show the sector remains strong with 57.6 (last 57.4). The ECB gives its latest monetary policy decision at 1245BST and whilst no change is expected the market will be very interested to hear Mario Draghi’s comments surrounding the recent market turmoil with his press conference at 1330BST. The ISM Non-Manufacturing is at 1500BST and although it is expected to dip back to 58.1 (from 60.3) this would still be a strong number.
Such is the impact of the elevated market volatility, calling equity markets on a day to day basis is a somewhat perilous occupation of late. The DAX Xetra is no different. Gaps are seen with alarming regularity and although I go by the old technical adage that “gaps close”, it does not make the heart beat any slower in this high octane period for stocks. The gap down from 10,132 from Tuesday’s open lower looks as though it could be “filled” early in today’s session, however failing at an intraday gap fill would be a negative signal and could give another chance to sell. On a daily basis we should be looking to “close” the gap (ie. a closing price above the gap fill tonight, which would be a positive move). However, the technical outlook is fairly concerning on a medium term basis now. The rallies are increasingly being sold into and the momentum indicators on the daily chart are all in bearish configuration to back up this outlook. For now, with such a difficult environment for equities we must continue to treat rallies as a chance to sell. This will be the case until the rally high at 10,383 is broken.
A strongly negative candle has all but negated the impending positive influence of Tuesday’s positive candle. And so with momentum indicators largely neutral the outlook is one of consolidation. I have talked previously about the support of the rising 21 day moving average (currently $1.1193) and this has caught the last two corrections and could now become an early indicator of the next move on the euro. The uptrend on the intraday hourly chart has been broken as yesterday’s slide has in the least confirmed that the bulls are not in control and more that the market is looking for the next catalyst. The hourly momentum indicators have actually started to turn higher again which will help to prevent a continued slide back towards $1.1155 again. The ECB meeting is today so expect there to be some volatility around that event (especially the press conference at 1330BST), however for now we may be in for some consolidation. Key near term resistance is now in at $1.1330.
I looked more medium term in my analysis yesterday as I see Cable as a range trade, and a “Doji” candle yesterday (open and close at the same level) plays into this whole theme. The RSI is close to 30 and the Stochastics are also settling their decline. The $1.5170 support is still intact and is still my limit before I believe I will have to change my view on Cable. Looking also on the intraday hourly chart the momentum is negative although it is not strongly bearish. Having said that there are no positive signals that would warrant looking for longs. There has not been any buy signal yet and it is too early to start placing medium term long positions, however I believe the time is close. Yesterday’s low at $1.5263 protects $1.5170. Resistance within the recent sell-off begins at $1.5350 and $1.5440 is key.
The choppy outlook is yet to settle and with technical indicators still indecisive this is a difficult trading period for Dollar/Yen. Even on the hourly chart, the signals are rather neutral and lack clarity. It had looked throughout yesterday that the resistance was building at 120.40 again near term but this has since been broken overnight. Sometimes, using technicals you have to take a step back and wait for signals to develop before taking a view. I feel that this may be one of those times with Dollar/Yen. The key supports to work with are in at 118.30 and Tuesday’s low at 119.20, whilst the rally peak at 121.74 is key resistance. It may take until after the Non-farm Payrolls to garner some decisive direction off this pair.
Gold has seemed to have lost some of the shine of its rally as yesterday’s trading posted a bearish candle that closed below the low of the previous session. The rally of the past week has always been rather tentative which I was happy to back, however, the impetus has now been lost. The daily Stochastics indicator is probably the one that concerns me the most, as it is turning lower at a 3 week low now. If we see the daily RSI confirming this on a move below 49 then I think that there could be some bearish momentum building. The intraday hourly chart shows that a sequence of lower highs is now forming with yesterday’s high at $1142.60 now in as the first line of resistance. A move below $1125.50 would be a negative signal and open the twin lows around $1117 again.
These are worrying times once more for anyone banking on a rebound in the oil price. Already there has been a 50% retracement of the recent huge rally from $37.75 to $49.33. However, the hourly chart shows that a head and shoulders top pattern could now be forming. The pattern was close to being completed yesterday but was saved by another incredible intraday rally. However the threat of the top pattern has not gone away. A daily close below the $43.60 neckline support would confirm the pattern. The problem is that with the height of the pattern being 50% of the rally, the inference of a breakdown would be a complete 100% retracement back towards $37.75 and a retest of the low on 24th August. The volatility is just incredible in this chart and with momentum indicators on both daily and hourly charts reflecting the increasingly corrective momentum. The 55 hour moving average which has acted as a decent gauge through this period, is now turning into a basis of resistance around $45.70. This could also be part of the formation of the high of the right hand shoulder. A top pattern would be a concern not only for the oil bulls but also anyone long of market risk assets and the markets generally.
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